I’m one for keeping market structure as simple as possible, and there are two major confluence support levels we need to be watching very closely that have been important market reversal points in the past, and we currently sit atop both of them.
What are they and what do they mean for the current state of the news-driven market?
Let’s start first with the intermediate term rising weekly trendline:
The intermediate term (2.5 years) trendline began at 666 with the March 2009 market low and connected the July and September 2010 market lows (1,010 and 1,040).
Extending the trendline into the present shows that the June 2011 low at 1,260 ended with a successful test of the trendline, and we again hit the rising trendline on Friday July 29th on the move to 1,280.
Keep this reference chart in mind as we play the “Will it Hold or Will it Break” game.
A firm close under the rising trendline would be expected to trigger additional selling as some nervous buyers liquidate their (hopefully) profitable long-term positions.
Beyond the intermediate term rising weekly trendline, we have the critical 200 day Simple Moving Average:
Some long-term investors use a stock chart for nothing more than to see if a stock (or index) is above its 200 day SMA.
Some investors also liquidate/close positions when a market firmly closes under this critical level while others see this as a fresh buying opportunity or chance to add to existing positions on a pullback to the key 200d SMA.
This is the whole purpose of key inflection points in a major market index: Some see the move into confluence support as a dream buying opportunity while others see a firm breakdown under key support as a dream short-sell opportunity.
This is how major chart levels – very obvious ones like this – become “Self-Fulfilling Prophecies.”
Additionally, we can make sense of the current range in terms of Value Areas, as I posted earlier this week.
We can analyze the markets in all sorts of complex ways, but at times like this, it’s helpful to use simple/plain methods and think objectively in terms of IF/THEN statements.
In whatever analysis method you use to study the market – fundamental, technical, or quantitative – it would do well for you to understand the importance of the Bull/Bear inflection zone at the confluence of the rising weekly trendline and rising 200d SMA.
Corey Rosenbloom, CMT
Afraid to Trade.com
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